All eyes are on the economy and the housing market right now. COVID-19 is disrupting the
economy. Businesses in non-essential sectors have been forced to temporarily close their
doors in compliance with a movement restriction order (MCO), the tourism industry is hard
hit, and the healthcare system is under strain.
Adding to this burden is the fact that oil prices have dropped to historic lows.
Malaysia is reliant on oil and tourism revenues. Like many people, you’re now wondering if the housing market will crash. It is probable that we’re heading for a recession. In the past, it was widely accepted that a
recession is 2 quarters of GDP decline. Some economists argue a different definition now.
The American National Bureau of Economic Research says a recession “is a significant
decline in economic activity spread across the economy, lasting more than a few months,
normally visible in real GDP, real income, employment, industrial production, and
According to this, we technically have not met the definition of a recession. Yet.
If the housing market is a significant part of the broader economy, how will it fare this year?
The Economics of the Housing Market
The housing market is perceived to be healthy as long as prices go up. Therefore, it is
common to track the housing price index (HPI) in a given market to gauge its general
performance. Historically, the long-term trend of house prices has been up. The HPI has not been negative
since 1999. Traditional economics tells us that supply and demand determine the price of a good or
service. If supply is higher than demand, prices go down. If demand is higher than supply,
prices go up.
Consequently, demand can be triggered by lowering prices. Therefore, if you wanted to
increase sales for a retail product, you can offer discounts. Retail store discounts can boost
demand significantly. However, it is a little different from the housing market. If prices in the housing market drop
significantly, demand does not necessarily go up. People are scared to buy houses when
prices go down.
Instead, there is a rush to the market when prices go up. This is because the demand for housing is speculative.
Another key factor in the housing market is that small increases in demand can have big
effects on price. This is because the supply is inelastic. Inelastic supply simply means that a shift in demand does
not cause a significant change in supply. The primary reason for this is the time it takes to
build new houses.
Financing Is a Key Driver for Demand
The U.S housing market crash is a great case study of how financing influences demand and
the market as a whole.
Between 2000 to 2006, incomes in the U.S did not rise, and population growth was minimal.
However, house prices nearly doubled. Demand also increased rapidly. What happened?
It became easier to buy houses because of a change in mortgage policy. In previous
decades, you needed 25% deposit to buy a house. Banks only gave 75% in financing. This
slowly changed. By the early 2000’s, people could buy houses with practically no money
Suddenly, everyone who was locked out of the market was able to buy a house.
Then came a financial innovation that allowed mortgages to be securitized. So, banks would
give out loans, but these loans were lumped together and sold to investment houses that
earned the interest.
Nobody was defaulting on their loans because house prices were going up fast. If you
couldn’t afford to pay your loan, you could just sell your house for a profit and pay the bank,
or the bank could foreclose your house and recover all its money plus interest.
As there were minimal defaults, rating agencies gave these mortgages very good ratings and
investment banks bought these mortgages, repackaged them, and sold it to investors.
Investors were happy at these perceived low-risk investments with good returns.
They pumped in more money.
Banks now needed to give out more mortgages with the money that investors were pouring
in. They needed more borrowers. So, they reduced their credit scoring assessments. It came
to a point where you could just provide a “stated income.”
You could be earning $4,000 per month but in your application, you could state that your
income was $10,000 per month. Nobody checked.
This scenario perpetuated itself until prices were unsustainable and people began to
default. The rest is history. What this example tells us is that the availability of financing to purchase a house is a very important contributor to demand and subsequently price appreciation. If buyers have
access to funds to buy a house, they will.
The Situation in Malaysia
BNM has done a good job of regulating banks and interest rates thus far. In 2014, when
speculation in the property market was becoming heated, BNM introduced cooling
measures, and banks tightened their lending policies. Home loan rejection rates were nearly
30% in 2015 and 2016. The government also raised RPGT and the net result was cooling down of the property
These policies have ensured that Malaysia was never in a property bubble.
Remember that supply in the housing market is inelastic? Therefore it took some time for
supply to adjust to the reduced demand. In 2019, as global economic uncertainty loomed with the US – China trade war, Bank Negara reduced the OPR. Recently, in the thick of the COVID-19 spread, it was reduced again.
Interest rates are currently at the lowest it has been in over a decade.
Interest rates can have a big impact on demand for housing. When it is cheaper to borrow,
more people will do it. In addition to this, BNM recently also reduced the Statutory Reserve Requirement (SRR)
from 3% to 2%. The effect will be more liquidity in the market.
There are also other economic stimulus policies in place. For example, a 6-month bank loan
moratorium and allowance for people to withdraw RM500 every month from their EPF
accounts. These are measures that improve liquidity. What about falling oil prices? Government revenue from Petronas will certainly be affected.
However, BNM Governor in 2014, Dr. Zeti Akhtar Aziz, pointed out that Malaysia’s economy
is diversified, and that oil and gas accounted for less than 30% of government revenue.
Lower oil prices mean lowered production costs and lower transportation costs which
lowers the prices of many goods and services. There will be an increase in exports and
COVID-19 is not a breakdown of financial systems. It is a health pandemic. China’s response
to it has been fast and the world is also responding quickly. If countries can successfully
flatten the curve, it will cease to be a problem in the post-peak period.
Post COVID-19, I think our economy may take a hit but the rebound will be sharp. Consumer
spending is being bottled-up with movement restrictions. It will come back with a
vengeance when we regain some normalcy.
All the measures to improve liquidity will cushion the effects of the MCO and the hit to the
tourism industry. Hopefully, this will be sooner than later.
Oh yes, and the housing market will most probably sail through 2020 without a crash on the
back of good fundamentals.
This article is brought to you by none other than Airbnb Ambassador, and Properneur, Mr. Ikhram Merican!
Follow and subscribe to his blog at https://www.livingspace.com.my/